The initiative promotes innovation and creates jobs by encouraging private sector investment in early stage small businesses, said SBA Administrator Karen Mills. Early stage small businesses face difficult challenges accessing capital in this financial climate, while venture capital funds are finding it difficult to raise money from institutional investors, she added.

By licensing and providing SBA financial backing to Early Stage Innovation Funds, the SBA hopes to expand entrepreneurs’ access to capital and encourage innovation as part of President Obama’s ongoing Start-Up America Initiative launched in 2011, Mills said.

High-growth potential, early stage companies commonly experience a gap in the availability of funding between $1 million and $4 million levels, according to the SBA. The agency said this gap is often referred to in the venture capital industry as the “Valley of Death.”

Since January 2006, less than 10% of all U.S. venture capital dollars went to seed funds investing at those levels, and 69% of those dollars went to just three states: California, Massachusetts, and New York, the SBA said.

The Early Stage Innovation Fund initiative targets this gap by licensing and guaranteeing leverage to funds focused on early/seed stage investments. The SBA said its improved licensing times complement the Early Stage Innovation Fund program.

In 2011, its first year, the program attracted 33 applications and approved six qualified funds to continue through the licensing process after raising their private capital, the agency said.

The SBA said it has committed up to $1 billion in SBA guaranteed leverage over a five-year period to selected Early Stage Innovation Funds using its current program authorization.

Licensed Early Stage Innovation Funds can receive up to a maximum of $50 million in SBA-guaranteed funding to match their privately raised capital. Early Stage Innovation Funds must invest at least 50% of their investment dollars in early stage small businesses.

SBICs are privately owned and managed investment firms that are licensed and regulated by the SBA. SBICs use a combination of funds raised from private sources and money raised through the use of SBA guarantees to make equity and mezzanine capital investments in small businesses. There are nearly 300 SBICs with more than $17 billion in capital under management.